Tactical Acquisitions And Share Repurchase Program Set To Elevate Earnings And Shareholder Value

Key Takeaways

• Strategic shifts, including share repurchases and capital management updates, aim to enhance shareholder value and support EPS growth.
  
• Expansion through acquisitions and organic growth in asset management positions Patria for increased revenue and management fee revenues.
  
• Patria Investments may face profit and efficiency challenges due to acquisitions, management fee reliance, portfolio complexity, foreign exchange risks, and potential earnings dilution from share issuance.

Catalysts

Operates as a private market investment firm focused on investing in Latin America.

• The initiation of Patria Investments' first share repurchase program and an updated capital management strategy suggest a strategic shift towards enhancing shareholder value, which is likely to support future earnings per share (EPS) growth by reducing the number of shares outstanding.
  
• The acquisition of the 50% of VBI that Patria did not previously own, alongside its already noted AUM growth, indicates an expansion of Patria's operational scale and future revenue potential. This expansion is expected to contribute positively to fee-related earnings (FRE) as VBI's assets double, enhancing Patria's revenue streams.
  
• Patria's aggressive expansion into asset management, as evidenced by the acquisitions of the abrdn private equity solutions business and the transfer of real estate investment trust AUM from Credit Suisse, introduces significant inorganic AUM growth. This expansion is poised to increase management fee revenues, fueling top-line growth.
  
• Patria's solid organic AUM growth, driven by strong fundraising activities and strategic initiatives across multiple strategies, outlines a clear path to achieving its ambitious organic fundraising target. This growth trajectory is anticipated to bolster management fees and distributable earnings (DE) moving forward.
  
• Patria's emphasis on building and leveraging its expanded distribution platform, including the growth of its sales and marketing team, and its focus on permanent capital vehicles, are forward-looking catalysts that promise to enhance its ability to generate organic growth. This strategic positioning is expected to deliver a significant impact on management fee revenues and, subsequently, on the company's net margins and earnings.

Assumptions

• Analysts are assuming Patria Investments's revenue will grow by 15.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 25.8% today to 71.9% in 3 years time.
• Analysts expect earnings to reach $353.2 million (and earnings per share of $1.68) by about October 2027, up from $81.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.2x on those 2027 earnings, down from 22.0x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 11.23% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.84%, as per the Simply Wall St company report.

Risks

• The integration of acquisitions and associated higher personnel expenses may pressure Patria Investments' profit margins and operating efficiencies in the short to medium term, impacting net margins.
  
• A reliance on management fees from newly acquired businesses with initially lower margins might dilute overall fee-related earnings margins, potentially affecting net income.
  
• The complexity and costs associated with managing a diverse and expanded portfolio of alternative investments could lead to operational inefficiencies, impacting the company's earnings and revenue growth.
  
• Foreign exchange movements have negatively impacted the net accrued performance fee balance, highlighting the risk to earnings from currency fluctuations which may affect both revenue and net earnings.
  
• The potential necessity to issue shares to fund acquisitions or meet deferred M&A payments may lead to earnings dilution, negatively impacting earnings per share.

Valuation

• The analysts have a consensus price target of $15.5 for Patria Investments based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $23.0, and the most bearish reporting a price target of just $12.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $491.4 million, earnings will come to $353.2 million, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 6.8%.
• Given the current share price of $11.75, the analyst's price target of $15.5 is 24.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.